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GRAND RAPIDS — Fifth Third Bancorp reported a 14 percent increase in second quarter operating earnings, the first financial results since Old Kent Bank was blended into the company.

Second quarter earnings of $338.2 million represented a 14 percent increase over the same period last year. Operating earnings exclude nonrecurring pre-tax merger charges of $255 million from the Old Kent acquisition.

According to President and CEO George Schaefer Jr., revenue growth was strong across all business lines, transaction account growth continued to be “excellent” and credit quality strong. He said sales results were among the highest in the company’s history.

Financial highlights included earnings per share of 58 cents for the quarter, up from 52 cents posted a year earlier. Return on average assets was 1.89 percent, and return of average equity was 18.9 percent for the quarter. The equity capital ratio was 10.01 percent compared to 8.53 percent in 2000’s second quarter.

The second quarter saw a continuation in the deposit growth trend. Average consumer deposits increased 16 percent. On the commercial side, the bank saw continued momentum on both the deposit and fee side of the business. Commercial deposits are up 9 percent and deposit service charges are up 21 percent.

“The deposit side is clearly the area where we think we drive the most net interest income in the company,” said Neal Arnold, chief financial officer. Average interest checking deposits were up 21 percent for the second quarter, average demand deposits were up 14 percent and transaction accounts increased by 14 percent.

Loan growth remained steady with average total loans and leasing increasing at 11 percent over the prior year.

Fifth Third’s current consumer campaign is at 132 percent of its goal, with 115,000 new accounts and more than $675 million in new balances already achieved, Schaefer pointed out.

“Perhaps the most impressive thing with these numbers is that they were reached when a significant percentage of our attention was focused on a smooth Old Kent integration,” Schaefer remarked. “It takes a lot to integrate these acquisitions. We spent a lot of brain cycles working on that. To put out these kind of numbers while in the middle of that is very, very positive.”

The numbers coming out of Old Kent were noteworthy, too.

“Their retail deposit service charges are up 21 percent. Their consumer checking account campaign has opened up $318 million in new accounts, which is 127 percent of the goal we set out when we started.”

As to the company’s small business checking account, Business 53, all the Old Kent affiliates are at 150 percent of their goal. Four out of the five OK affiliates are among the top of all Fifth Third affiliates.

“The Old Kent people are performing very well,” he added. “We have a great deal of talent in Chicago and Michigan. What they’re doing on the sales side has exceeded our expectations.”

The conversion of Old Kent Chicago locations to Fifth Third’s systems and processes last month was the most successful in Fifth Third’s history, he said, and progress at Old Kent is ahead of expectations.

In addition to Chicago, the Fort Wayne conversion is completed. Detroit and northern Michigan will be converted on Aug. 10, and then the company will finish up in Grand Rapids with its western Michigan affiliate in early September.

Old Kent has adopted the Fifth Third culture very quickly, Schaefer said, and he attributes that in large part to stock options issued earlier this year. Options were priced at $50 a share when the stock price was $60.

“That is an extremely strong cultural motivation for people. They immediately saw the impact of what we’re trying to sell them. They had it in their hand.”

Fifth Third’s credit quality continues among the highest in the industry and non-performing assets remain extremely low as a percentage of total loans at 44 basis points, Schaeffer noted. Net charge-offs decreased seven basis points from first quarter levels to 39 percent.

“Overall we’re very pleased with the quality of our overall portfolio,” Schaefer said. “I do want to add that we’re very pleased with the core commercial loan portfolio up at Old Kent. That has turned out to be better than we had anticipated. That’s holding up very well in view of what’s going on in the industry.”

Going forward, the focus will be on Old Kent integration and “getting it right,” he said. “We have a great opportunity to build for the future with this merger so it’s very important that the integration goes smoothly both for our customers and for all of our employees.

“With most of the conversion scheduled for the second half of this year, the cost saves coming out of Michigan and Chicago markets are going to start to show in the fourth quarter and on into the next quarter of next year. But we still have a lot of work to do to make sure we get back to our traditional expense numbers.”

He said Fifth Third is maintaining a higher level of expenses to ensure that it doesn’t exchange “a dollar of cost saves for two dollars of revenue growth.”

The company anticipates sustained revenue and deposit growth in its retail businesses, and plans continued focus on deposit gathering on the commercial side, with added emphasis on treasury management services. Treasury management grew by 20 percent during the quarter.

The bank experienced a 22 percent increase in income on fee-based businesses, excluding mortgage banking. Data processing led the growth, with a 32 percent increase over second quarter 2000. Electronic funds transfer and merchant processing services (MPS) have naturally grown with the trend toward electronic forms of payment in the retail sector.

Arnold said it’s the sixth consecutive quarter that MPS has been above a 30 percent growth rate.

Fifth Third’s investment advisory business is up 14 percent. Schaefer said Fifth Third will continue to push to make both data processing and investment advisory a bigger piece of the overall mix.

During the second quarter, Fifth Third completed the sale of Old Kent’s subprime mortgage operations, including a $300 million loan portfolio. The company also signed a definitive agreement to sell Old Kent’s West Coast mortgage operations in the third quarter. The West Coast offices produced about $4.6 billion in residential mortgages year-to-date. Fifth Third is still working on divestitures of Old Kent’s East Coast mortgage origination operations, Arnold noted.

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